The world we are living in today has changed completely after the spread of Covid-19. Back in 2018 and 2019 globally economies were grappling with US & China trade war, lower retail demand and subdued inflation rates. The current scenario has taken completely 360 degrees turn, all thanks to Covid-19 pandemic. Global economies were under strict lockdowns in 2020 which caused supply chain disruptions and mismatch in supply & demand for goods & services. Also, ongoing ESG theme and climate change awareness has guided significant shift in investments towards greener and sustainable products. Together all these reasons have resulted in both positive and negative effects on global economies.
�Supply & demand mismatch opened on to rise in commodity prices which is causing end products to be expensive than earlier. Commodity driven economies are seeing sharp rise in inflation, Brazil has seen 5th rate hike for this year during September 2021 policy-meeting. Fed has also mentioned to raise rates as soon as the tapering program comes to an end, clearly inflation would be a big concern for global economies. Investors are worried about inflation which is clearly seen in sharp movement in bond yields, 10-year UST gained 24bps in the month of September 2021. Hang on, that�s not just end of after-effects of pandemic.
Global central banks have tools to battle economic crisis by easing the interest rates to spurt the growth, but can these tools fill in the supply gaps to meet the demand? To some extent yes, corporates can borrow money at cheaper rates to expand their capacities. Borrowing capital at cheaper rate would bring down their cost of capital, but to commercialize the capacities it would take roughly 1-3 years as per industry dynamics. Manufacturing industries like Chemicals and Pharma are shifting out of China to India to have smooth supply chain management and, China has been very strict on carbon emissions and aims to be carbon neutral by 2060. This has affected the short-term supply which caused huge pent up demand order backlogs which resulted in shortage of shipping containers. Baltic dry index which is considered as general shipping market bellwether is at close to 13-year highs. Following chart represents Baltic dry index plot from 2012-2021.
Source-Tradingview, Twitter
Power crunch?
Pent up demand has not only disrupted manufacturing, logistics and commodities sectors but now is causing serious power crunch in major economies. China & India are still dependent on thermal power which are powered by Coal, shortage of Coal and higher demand for industrial power is causing power crunch in both the countries. Coal futures continued to break fresh records to USD 218 per metric ton, after gaining 27% in September 2021, and adding 171% so far on the year. Several factors have been pushing coal prices up, including tight supply in China as the country vows to achieve emissions standards and reach carbon neutrality by 2060; a lack of mine investment reflecting pressure from ESG conscious investors; imports constraints due to coronavirus restrictions and a surge in natural gas prices amid prospects of a shortage in inventories, especially in Europe.
World Coal Consumption
India is the second largest producer of coal and 80% of it is produced by Coal India. Although being the largest producer, India still imports coal from Australia to meet domestic demand. Usage of power has risen substantially and thermal plants in India are running out of coal. Nearly 100 of the 135 plants had less than 7 days� worth of buffer coal stock in September 2021 (Source � ET).
To summarize...
Lack of fresh investments in fossil fuels and Covid-19 restrictions are leading the path for sharp rise in demand for commodities, which is also causing higher inflation. Abnormal occurrence of Flash floods, hurricanes, and forest fires have resulted in escalation of ESG based investments.
Major central banks are looking to raise interest rates on the wake of inflation concerns. Bond yields have reacted to the same. Corporates with higher debt in the commodity space witnessed fall in bond yields on the back of better business outlook. Checkout latest yields on Inrbonds marketwatch screen.
